The huge new oil refinery being built by Dangote Industries in Lagos is a landmark in more ways than one. Not only will the US$12 billion plant be one of the biggest refineries in the world, with the capacity to refine 650 000 barrels per day, but it is a massive step forward on a continent that has struggled to introduce and maintain this leg of the oil value chain.
Africa has the lowest number of refineries of any continent – a mere 46 according to a count made by a Nigerian energy lawyer in 2016 and many of these are ageing facilities built in the early years after independence. Fifteen of the refineries are located in just two countries, South Africa (six) and Egypt (nine). This is in comparison to the 140 refineries in the US – a country with a population size that equates to a quarter of the African continent’s.
The result is that even though Africa produces three-and-a-half times the amount of oil it consumes, most countries have to import all their refined fuel requirements. Even Nigeria, the world’s fifth-largest oil exporter, spends up to US$14 billion (the peak – 2011 – figure) importing fuel, mostly gasoline. In June, Nigeria’s Petroleum Resources Minister, Ibe Kachikwu, said the country’s refining capacity was one-sixth of what was needed to meet domestic demand.
Kenya imports all of the gasoline it needs since the country’s only refinery, a 53-year-old plant in Mombasa, was closed in 2013. In Ghana, the country’s only refinery, in the port city of Tema, is producing at only a fraction of its original (1963) capacity after a series of breakdowns. Even in South Africa, most oil-refining capacity dates back to the 1960s. It is clear that the construction of refineries on the continent has not kept pace with developments in the extraction of the resource.
The fact is that the economics of oil refining are not straightforward. One of the biggest hurdles has been the tendency of African governments to subsidise the price paid at the pump, supposedly to the benefit of their own citizens and nascent industries. Not only has this backfired in unexpected ways – cheap Nigerian gasoline is smuggled into Benin, Cameroon, Chad and Togo – but it is also a massive disincentive to the oil majors and national petroleum corporations that typically build refineries. Given artificially low prices, the returns on investment are too low to justify the initial investment. Further down the line, these also inhibit spending on maintenance and expansion of the few existing refineries. In 2016, the Economist reported that any attempt to build a new refinery in Nigeria while subsidies remained in place ‘would be lunacy’.
In 2012, the Nigerian government was forced to reverse an attempt to reduce fuel subsidies after mass protests and stayaways at schools, shops and petrol stations. However, the collapse of the oil price after 2014 offered a new opportunity to bring gasoline prices in line with market dynamics. Lower prices, of course, cushion domestic fuel users against the withdrawal of subsidies. The removal of some, not all, subsidies in Nigeria in 2016 saw the price of gasoline rise 67%, which more or less left it at the same level Nigerians were paying in 2014. In 2016, subsidies were also slashed in Angola, Cameroon and Sierra Leone. Ghana had taken the same step two years before. It is only these sorts of fiscal savings – motivated and endorsed by the African Development Bank – that have made projects such as Dangote’s mega-venture possible.
The Dangote refinery, currently on track for completion in 2019, illustrates the benefits to be gained from indigenous refining capacity. Not only does domestic refining have a positive effect on a country’s balance of payments but it is also a part of the overall mosaic of industrial development. In the Dangote refinery case, other petrochemical spin-offs include a 2.8 million-ton fertiliser manufacturing plant and a gas facility. In South Africa, the oil refineries have allowed the country to be autonomous in the production of bitumen, essential for tarmac road surfaces.
Competition from cheaper imported fuel products can also distort the incentives in the refining business. This was a factor quoted in the debate in South Africa in 2014 and 2015 when the country’s National Energy Regulator conducted hearings on the proposal to construct the first import terminal in Cape Town. The proposal, by a combined Dutch and South African venture called Burgan Cape Terminals, was approved despite strenuous opposition from oil major Chevron, which operated a refinery in the city.
The South African government has a clean-fuels policy, intended to bring the quality of the country’s gasoline up to European standards. In 2006, it switched to unleaded gasoline at the Euro 2 level of cleanliness. The subsequent policy has been to extend this to the much higher Euro 6 standard. Each successive standard reduces the sulphur content of gasoline used in vehicles.
The problem is that three of South Africa’s crude oil refineries are ageing and require costly upgrades to meet the standard. The total cost is not known but consultants appointed by the South African Petroleum Industry Association have suggested a range of between ZAR30 billion to ZAR50 billion. Chevron argued, in effect, that allowing cheaper imports through the Burgan-owned terminal would undermine its own attempts to pay for the upgrades through cost-recovery.
In early 2017, Chevron’s refinery and other South African assets – including 800 service stations – were sold to Chinese parastatal Sinopec for US$900 million. Although Chevron is looking for disinvestments and savings worldwide as it concentrates on a massive (US$40 billion) investment in Kazakhstan, ongoing lack of clarity around who will pay for South Africa’s clean-fuel ambitions is known to have been a factor.
South Africa has a sophisticated, although mostly ageing, refining infrastructure backed by an established legal framework. It has four crude and two synthetic refineries. The one inland crude refinery, Natref in the northern Free State, which services the Gauteng economic hub, benefits from the ‘neutrality principle’, which requires that inland refineries not be disadvantaged by the cost of transport from the coast. This requires an effective subsidy from the pipelines division of state-owned transport utility Transnet.
South Africa’s recently appointed Energy Minister, Mmamoloko Kubayi, announced in May that government would make a final decision this year on whether to proceed with a new refinery. She said that imports of refined fuels are increasing. However, the idea of another refinery in South Africa has been around for nearly a decade and has previously foundered on cost issues. The national oil company, PetroSA, put forward a proposal for a 400 000-barrel-a-day refinery in 2010 but the US$10 billion price tag and a lack of interest from prospective equity partners scuppered the deal. It is far from clear that conditions have shifted in any significant way since then.
It’s all too easy for a country to simply notice a gap in the value chain and, in response, announce that it wishes to build an oil refinery. Ghana’s previous President, John Mahama, made such an announcement last year. But getting the pricing and regulatory issues right is far more difficult and, as the issues around fuel subsidies and clean gasoline indicate, require a capacity to make trade-offs. In Nigeria, the Dangote refinery is showing it can be done. May other countries follow suit.